Process improvement in an industrial procurement department
Tabaqueira EIT, SA | Philip Morris International
Inês Rey Guimarães Nascimento
Master’s Dissertation
FEUP supervisor: Eduardo Gil da Costa Tabaqueira supervisor: Patrícia Pinto
Faculda de de Engenharia da Universidade do Porto Mestrado Integrado em Engenharia Industrial e Gestão
Abstract
The following dissertation analyses the application of process improvement in a procurement department. Considering the interaction between this department and all other functional departments in the organisation, successful changes lead to overall organisational improvement.
The addressed problems refer to the lack of standards for managing negotiation processes, the extensive workflow needed for processing purchase orders, and the implementation of alternative inventory management systems. For each problem, solutions are presented, focusing on simplicity and on the systematisation of processes.
From the development of the presented solutions it was possible to conclude that process improvement is of essence in organisations nowadays, and can always be achieved, even in an international organisation with mapped out processes and extensive configuration of workflows and system configuration.
Although the financial impacts of the proposed solutions are not apparent as of the writing of this dissertation, as the implementation is not yet completed, qualitative impacts, namely considering the reduction of workload in the procurement department were attained.
Melhoria de processos num departamento de compras industrial
Resumo
A presente dissertação analisa a aplicação de melhoria de processos num departamento de compras. Tendo em conta a interação entre este departamento e os restantes departamentos funcionais na organização, a implementação com sucesso de mudanças leva também a uma melhoria organizacional.
Os problemas analisados referem-se à falta de estandardização para a gestão de processos de negociação, ao extenso fluxo de trabalho necessário para o processamento de ordens de compra, e à implementação de soluções alternativas para a gestão de inventários. Para cada problema são apresentadas soluções, com foco na simplicidade e na sistematização de processos.
Com base no desenvolvimento das soluções apresentadas foi possível concluir que a aplicação de melhoria de processos em organizações é essencial nos dias de hoje, e pode sempre ser atingida, mesmo numa empresa de dimensão internacional, com processos mapeados e uma configuração extensa dos seus processos e sistemas.
Embora os impactos financeiros das soluções propostas não sejam aparentes à data da escrita desta dissertação, uma vez que a sua implementação não está concluída, impactos qualitativos, nomeadamente no que diz respeito à redução de carga de trabalho no departamento de compras, foram atingidos.
Acknowledgments
First of all, I would like to thank my supervisor at FEUP, prof. Eduardo Gil da Costa, for his constant help and availability, and for accommodating all my last minute changes and doubts. I also would like to express my gratitude to my supervisor at Tabaqueira, Patrícia Pinto, for her constant support during this project and for welcoming me to her team. A team that I also want to thank: My thank you to Cláudio Castanheira, José Rato, and Sandra Santos for accommodating an extra table in their office, and for putting up with me and always making me feel as part of the team.
Still at Tabaqueira, I have to thank Manuel Gameiro and Daniel Faustino in the technical materials department for receiving me so well and always being there for my constant questions. And finally I have to thank everyone that I crossed at Tabaqueira, for making me feel welcome from the first day.
Last but not least, I thank my family and friends whose support is a constant in my life.
Contents
Abstract ... iii
Melhoria de processos num departamento de compras industrial ... iv
Resumo ... iv
Acknowledgments ... v
Acronyms ... vii
Figure Index ... viii
1 Introduction ... 1
1.1 Philip Morris International ... 1
1.2 Tabaqueira EIT – A Philip Morris International Affiliate ... 1
1.3 The Procurement Department at Tabaqueira ... 2
1.4 The Project: Process Improvement in the Procurement Department ... 2
1.5 Methodology ... 3
1.6 Structure of the Dissertation ... 5
2 State of the Art ... 6
2.1 Procurement ... 6
2.2 Process Improvement ... 7
2.3 Enterprise Resource Planning (ERP) ... 9
2.4 Inventory Management... 13
2.5 Kanban ... 14
3 The Tobacco Productive Process ... 16
3.1 Primary ... 16
3.2 Secondary ... 17
3.3 Technical Materials Department ... 17
4 Presentation of Problems and Solutions ... 19
4.1 Lack of Standards in the Procurement Department ... 20
4.2 Purchase Orders Processing ... 26
4.3 Inventory Management... 30
5 Conclusions and Future Work ... 35
Acronyms
BOM – Bill of Materials CI – Consignment Inventory EDI – Electronic Data Interchange ERP – Enterprise Resource Planning GR – Goods Receipt
IM&S – Indirect Materials & Services IR – Info Record
LU – Link-Up
MRP – Material Requirements Planning MRP II – Manufacturing Resource Planning PDCA – Plan Do Check Act
PMI – Philip Morris International PO – Purchase Order
PR – Purchase Requisition RFI – Request for Information
RFID – Radio-Frequency Identification RFP – Request for Proposal
RFQ – Request for Quotation ROP – Reorder Point
SKU – Stock Keeping Unit SL – Source List
SME – Small and Medium Enterprises SOW – Statement of Work
SRM – Supplier Relationship Management TMW – Technical Materials Warehouse TPS – Toyota Production System
Figure Index
Figure 1 - Organisation Diagram ... 2
Figure 2 - Porter's Value Chain ... 7
Figure 3 - PDCA Cycle ... 8
Figure 4 - Stated Reasons to Implement ERP ... 10
Figure 5 - ERP Life-Cycle ... 11
Figure 6 - Example of EDI use ... 12
Figure 7 - Kanban Card ... 15
Figure 8 - Virginia Tobacco Leaf ... 16
Figure 9 - Negotiation Process Workflow ... 20
Figure 10 - Process Types Listing ... 23
Figure 11 – Representation of Checklist ... 23
Figure 12 - Purchase Order Workflow ... 27
1 Introduction
The present dissertation explores the implementation of process improvement methods in the Procurement Department at Tabaqueira EIT, SA, a Portuguese tobacco company. This results from the need for a company, in the current economic context, to focus on achieving improvements and savings, in order to keep being competitive. But before explaining the project related to this dissertation, it is important to introduce the company and the department on which it is based.
1.1 Philip Morris International
Philip Morris International (PMI) is an enterprise integrated in the tobacco industry. Its core business is the production of cigarettes, and it is the world leader on sales of this product since 1972. Even so, it also commercializes other tobacco products, such as rolling tobacco and snubs.
PMI’s history begins in 1847, when Philip Morris opened a tobacco and cigarettes store in Bond Street, London. The business was kept in the family until 1894, although the company was open to public capital since 1881. At the beginning of the 20th century the company expanded to New York, and half of its capital was acquired by American partners. In 1919, Philip Morris Company, as it was then called, was totally bought by its American shareholders. Its production facilities were transferred to Virginia, and, in 1924, one of the best known tobacco brands was created: Marlboro. In the 1950’s, with a firm presence in Northern America, the company created PMI so as to distribute its products across the globe. (PMI, 2013)
Since the creation of the first American affiliate in 1953, PMI has been expanding both geographically and in terms of productive capacity. Currently, PMI has factories positioned across the different continents and manufactures its products in over 180 countries. Of the top 15 brands sold worldwide, seven of them are PMI products, as is the case of Marlboro, L&M, and Chesterfield. In 2008, in a spin-off process, PMI separated from Altria Group, to which it belonged, achieving a market share of over 15% at that time. It is still currently the biggest tobacco company in the world. (PMI, 2013)
1.2 Tabaqueira EIT – A Philip Morris International Affiliate
Tabaqueira was established in 1927 by Alfredo da Silva, who was granted the concession to operate the tobacco business in Portugal. In 1962, the factory of Albarraque was inaugurated. It is still in this same spot that the productive facilities of Tabaqueira can be found today. In 1975 Tabaqueira was nationalized, and it became an S.A. company, in Portugal designated as Anonymous Society, in 1991. However, it was only privatised again by the end of the year 2000. Currently, Philip Morris International holds 99% of Tabaqueira’s social capital.
Since 2008, Tabaqueira is organised into two sister companies: Tabaqueira – Empresa Industrial de Tabacos, S.A., which is responsible for the productive aspect of the company, and Tabaqueira II, S.A., which is responsible for the commercialisation of cigarettes and other tobacco products in the Portuguese market (PMI, 2013).
With the implementation of this new structure, the purchasing of raw materials and the commercialisation of the finished goods in international markets are conducted by the mother-company, PMI. It is also PMI that is in charge of decisions related to long term production
plans, acquisition of new productive equipment, product specifications and quality standards, and client relationship management. Tabaqueira EIT is accountable for, amongst others, procuring all indirect materials and services necessary for the functioning of the factory, establishing short-term production plans, and for performing the entire productive process, from the arrival of packages of tobacco leaf to the exit of pallets of finished goods, ready for distribution.
1.3 The Procurement Department at Tabaqueira
The Indirect Material & Services (IM&S) Procurement Department of Tabaqueira is directly responsible for the procurement of all the materials and services that are necessary for the adequate fulfilling of any of Tabaqueira’s functions, from administrative processes to the manufacturing of products itself. This dissertation focuses particularly on this department, and the processes related to its daily business.
The procurement department belongs to the Operations department, more specifically to the Supply Chain department, as explained on Figure 1. This organisational positioning helps understanding the role of procurement in Tabaqueira, since all acquisition and management of goods and services that are accessory, but indispensable, to the functioning of Tabaqueira, namely of the manufacturing process, are managed by the IM&S Procurement Department. Therefore processes such as leading negotiations, contract management, acquisition of spare parts, amongst others, are all within the scope of this particular department.
The main goal of the IM&S department is to “fully satisfy the internal customer, through the procurement of materials, goods, and services indispensable to the global functioning of the company, at the best price, respecting the required quality, and within the necessary deadlines, always following the Practices and Principles of the company” (PMI, 2013).
1.4 The Project: Process Improvement in the Procurement Department
As it can be inferred from the description of the IM&S procurement department scope, the daily business of this department implies directly dealing with Tabaqueira departments,
Figure 1 - Organisation Diagram Source: PMI intranet
and often with PMI global departments. Every project or action that requires any kind of expenditure will have to involve the procurement department, no matter its origin or purpose. Therefore, it is only natural that improving procurement processes will bring about benefits not only to one particular department, but to the entire organisation. This dissertation addresses different issues that present themselves as open for improvements. These different problems are not related between them when it comes to key concepts. Nevertheless, what they have in common is that they all exist in procurement processes, and have implications in the day-to-day functioning of this department.
The first addressed problem is the lack of standards in the procurement department. There was no documentation to support negotiation processes, which led to unavoidable workloads to track the status and development of any processes, as well as all the files and documents related to those processes. To solve this particular problem, two different documents were created, so as to back any negotiation process from the beginning.
The second problem is the deficiency in ERP processes in the purchase order creation process. The involved process implicates a complex workflow, and the lack of automatic procedures leads to the need for workload to execute non-value-added activities. This problem was exacerbated to deficient inputs in the system over time, which kept propagating, leading to incorrect parameterisations for outputs.
The final problem concerns the spare parts warehouse, and its inventory management system. Considering the amount of different materials kept in stock, the workload needed to process and store low value materials is often disproportionate to the obtained benefits. There was a need for studying new inventory management systems that could solve this disparity. New methods for Supplier Relationship Management are also considered in order to achieve reductions in the workload for material procurement.
1.5 Methodology
Tabaqueira, as part of the bigger multinational that is Philip Morris International, is an organisation of considerable age and size. As such, all processes have at one time or another been addressed and studied. This brings about a multitude of positive aspects. Its Enterprise Resource Planning (ERP) software is extensive and in use in all departments. Its configuration is specific to the company’s needs, allowing for an effective transfer of information not only across departmental boundaries, but also across affiliates. The successful implementation of ERP is one of the main strengths of Tabaqueira and PMI. Also, every single process is deeply rooted in PMI’s Practices & Principles, which are developed and applied in all their affiliates. This means that every affiliate runs on the same objectives and principles. Therefore, the exchange of information between affiliates becomes a more fluid process. Consequently, if an affiliate undergoes a transformation of a process that is successful, this change is transmitted to the other affiliates. Change and improvement are often based on best practices which can be found in any affiliate around the world.
However, these positive aspects can also present some constraints to the implementation of change and process improvement. Every process is extensively systematised, based on software that has undergone substantial studies and configurations that apply to every PMI production site. Thus, substantial changes, such as the implementation of new software or algorithms are unthinkable. Considering these constraints, the main methodology used for implementing new solutions is the accurate studying of each process. This implies analysing each step of the process and their underlying Practices & Principles.
Communicating with other affiliates and exchanging information on best practices is another way of developing new solutions for Tabaqueira’s processes with room for process improvement.
Data Gathering and Analysis
The methodologies followed for this dissertation are mainly qualitative, although quantitative aspects are also taken into account to understand the impact of achieved results. But as the implementation of the proposed solutions is still underway, it is not always possible to gather the necessary results to analyse the degree of financial success.
In approaching the challenge of improving processes in the procurement department, the first step was to list the existing processes and establish the ones that were most prone to undergo changes so as to achieve perceptible improvements. Taking into consideration that some improvements have direct impact in the procurement department’s objectives for the year, and with the help and input of other departments involved in the different processes, it was possible to define the problems to be addressed.
Once the problems were identified, it was necessary to map out accurately the current state, as well as the desired future state. To do so, the adopted methodology was to start by collecting data. This was done firstly by consulting existing documentation on the subjects, found in PMI’s files and databases. This provided an overview of the existing processes, as well as of related best practices, and also guidelines and principles that must be followed. Secondly, members of the different involved departments were consulted, so as to gather information from different points of view, as well as to establish eventual user requirements from the different users. Maintaining contact with staff from the different departments was a constant during all the improvement process, as assembling expertise from different fields is clearly a distinct advantage. In addition to contacting with internal departments, the exchange of information with other affiliates, particularly with affiliates that had addressed, or were addressing, similar problems, was another significant source of data.
Another important step was researching and analysing existing scientific papers on the addressed subjects. The understanding of key concepts in the different theories was fundamental in order to correctly apply them in the development of possible solutions. Also, the studying of case studies and success stories from scientific papers, as well as from other affiliates, provided an essential analysis of expected and possible results, as well as obstacles and hindrances which could be expected to be found during the implementation of the possible solutions.
During the development of the proposed solutions, the analysis of results – or expected results – was mainly based on input and feedback from the procurement department team, as well as members from the involved departments. Members from other affiliates addressing similar problems and implementing similar solutions were also consulted not only for feedback but also for benchmarking. When, during the development of the proposed solutions, new data or new obstacles arose, the previous steps of data gathering were revisited. Finally, the results to be expected from the proposed solutions were shared by consulting with all involved members, as well as with Tabaqueira’s management team. The comparison of expected results from the suggested solution with the expected results from the annual objectives for the procurement department provided a logical tool for establishing the success of the presented solutions. The financial impact of the improvements to be applied
can only be identified when the implementation is completed. However, qualitative results, such as successful elimination of unnecessary tasks and diminishment of workload can be observed, if not quantified.
1.6 Structure of the Dissertation
This dissertation begins with an introduction, presenting the company and the department which were the source of analysis. It also states the existing problems, as well as the used methodology.
The second chapter reviews existing literature on the underlying concepts of the addressed problems. As the nature of the problems is diverse, so is the nature of the analysed subjects. Therefore, they are addressed in the same order as the problems that they relate to.
The third chapter is a continuation of the state of the art. It describes the productive process at Tabaqueira. It also describes the technical materials department, as it is directly related to the productive areas and has a significant impact on the problems addressed by this dissertation.
The fourth chapter is a concatenation of what is normally described in two chapters. As it was mentioned earlier, three different problems are addressed, therefore three solutions are presented. To maintain a logical stream of information, in this fourth chapter each problem is described and then followed by a description of the proposed solution, and a brief conclusion.
The fifth and final chapter refers to the conclusions drawn from the addressed problems and offered solutions. It also presents opportunities for future work related to the studied issues.
2 State of the Art
This chapter presents a literature review of concepts relevant to the problems addressed in this dissertation. Firstly a definition of “procurement” is presented, and its role in the organisation is explained, as well as its positioning in Porter’s value chain. Secondly, the concept of “process improvement” is studied, alongside with some of its relevant methodologies, considering the subject of this dissertation. The importance of process improvement in a procurement department is also considered. Since all procurement processes at PMI are, to different degrees, rooted on the utilisation of the ERP system, the third part of this chapter addresses this concept of ERP.
The implementation of Electronic Data Interchange (EDI) through the ERP is also reported, as it is of particular relevance to procurement processes, namely in the creation of purchase orders. This section is followed by a study on “inventory management” concepts, such as Vendor Managed Inventory (VMI) and Vendor Owned Inventory. These are protocols that can be employed for managing stocks, and which significantly alter the role of the procurement department in the creation and management of purchase orders. Finally, the continuous improvement concept of Kanban is analysed, as it is relevant in the implementation of new inventory management systems.
2.1 Procurement
According to van Weele, procurement can be defined as “the management of the company’s external resources in such a way that the supply of all goods, services, capabilities and knowledge which are necessary for running, maintaining and managing the company’s primary and support activities is secured in the most favourable conditions” (Weele, 2010). For that reason, all companies have a procurement function, with responsibilities that can range from purchasing raw materials to managing contracts for engineering projects. As an indispensable function to any business, it is important to study the role of procurement in the daily activities of a company.
For better understanding the role of procurement in a company, it is adequate to analyse its position in Porter’s value chain (Figure 2). According to Porter, all activities that are performed in a company in order to produce the final product can be represented using a value chain. Furthermore, these “value activities can be divided in two broad types, primary activities and support activities”. (Porter, 1985) Primary activities are directly and physically associated with the production of the end product. These activities are inbound and outbound logistics, operations, marketing and sales, and service. Support activities exist, as the name indicates, to support primary activities and each other. Firm infrastructure, human resource management, technology and procurement embody the support activities category.
As a support value activity, procurement is, as stated by Porter, “the function of purchasing inputs used in the firm’s value chain, not the purchased inputs themselves”. (Porter, 1985) This definition is coherent with Wheele’s definition.
Procurement can then be defined as a support activity in a company, which exists to provide assistance to all primary activities, as well as other support activities. The activity of procurement can indeed be demarcated as having a wide degree of variety in its field of action. Every time a company needs to acquire a good or a service, however small, the procurement department must be involved. Therefore, although procurement is a support activity, it is nevertheless an essential one.
2.2 Process Improvement
Merriam-Webster defines process as “a series of actions or operations conducting to an end” (Merriam-Webster, 2013) and to improve as “to enhance in value or quality: make better” (Merriam-Webster, 2013). Therefore, process improvement can be defined as a way to enhance the value of the actions and operations that are necessary to achieve a specific end.
Any company, no matter the sector where it operates, is continuously evolving, along with its outside environment. It must to do so, in order to avoid becoming obsolete. This evolution is a continuous process of changes and refinements necessary to meet new requirements, and new expectations, as defined by the stakeholders and the markets. Process improvement then must be the focus of any company. And this focus must be implemented in its culture. Often the problem with the implementation of process improvement methods is related to the misalignment between an organisation’s business goals and its goals on an operational level. For successfully implementing changes, the company must promote a positive attitude towards it. Processes must be analysed, in order to define the current state, assess critical process problems, and determine a desired future state. The main objective is the establishment of more efficient and effective activities. However, companies are composed of different functional departments, each with different processes, which, nevertheless, tend not to be independent between them. Therefore, when considering the
Figure 2 - Porter's Value Chain
application of process improvement methods to a single process, it is necessary to analyse the system of processes in which the specific process is integrated. Often improving one process may reveal to be counterproductive when considering the entire system. Therefore, goals for success should be established considering a system as a whole (Lepmets, et al., 2012).
The successful implementation of improvement efforts also depends on the education of the involved individuals, i.e. the individuals with the right knowledge and the right skills should address the right processes. To ensure that this is the case, Rohleder, et al. propose a conceptual framework for implementing process improvement in a systematic and flexible manner. The starting point is ensuring the involvement of senior management, along with the adequate organisational support. The second and third steps encompass the decision on which processes to tackle and the definition of the appropriate team to address the issues. Next, the analysis and understanding of the process is of essence. The fifth step then proceeds to the removal of evident wastes and non-value-added activities. Further steps are related to the acquisition of data to accurately monitor the process, and defining whether it has stabilised or not. If the process is not stable, there are still issues to be addressed. When the process is finally stable, it is necessary to assess whether the improved process meets the established target (Rohleder, et al., 1997).
Related to this proposed framework is the concept of Plan-Do-Check-Act (PDCA), which goes hand in hand with the concept of process improvement. PDCA, also known as Deming cycle (Figure 3), is a management tool consisting of four iterative steps, for controlling the success of continuous process improvement. It can be applied in any activity without any immediate financial implication. However, it relies on one crucial factor: acting upon feedback (Charantimath, 2011) .
The first step of the PDCA cycle is Plan. Planning implies the definition of the desired improvement. To do so, the process must be mapped and studied, so as to determine the causes for the problem and suggest possible solutions. In this step a plan for implementing the selected solutions should be elaborated. The second step, Do, represents the execution of the plan. It is important during this step to keep track of the development of the actions put in practice. The third step, Check, comes next. During this step an analysis of the results obtained from the implemented solutions is made. This step is also frequently called Study. The final step is Act. This implies acting upon the findings of the third step. As progress and outcomes may not have been the desired ones, the fourth step is used to bring the process improvement back on track. (Campbell, et al., 2010)
Plan
Do
Check
Act
As with continuous process improvement, the PDCA cycle is iterative. It is constantly being repeated in order to keep improving, while maintaining the achieved results from previous improvement actions.
Process Improvement in a Procurement Department
Considering once more Porter’s value activities, it is noticeable that the cost of running procurement activities is negligible when compared to the cost of the goods and services. However, these activities can have a significant impact on other activities, especially considering that procurement is a support activity which interacts with all the other activities, both primary and support. Therefore, improving purchasing practices can affect the cost and quality not only of the products themselves, but also of the outputs of all the areas that directly or indirectly interact with these products. (Porter, 1985)
Furthermore, considering the current state of the world economy, savings are increasingly becoming the focus of all activities. By directly dealing with the contracting of both goods and services, procurement activities are becoming an evident target for process improvement. By standardising and mapping accurately all procedures undertaken by procurers, and eliminating non value-added activities in a procurement process, significant savings can be achieved.
Finally, the procurement department is particularly attractive to implement process improvement. Considering once more Porter’s value chain, the procurement department is a support activity. This means that it develops connections with every other activity. This originates a myriad of different processes, with different workflows, different objectives, and even different internal customers. This variety of processes directly implies a variety of activities available for analysis, and therefore, for process improvement.
2.3 Enterprise Resource Planning (ERP)
Enterprise Resource Planning (ERP) systems are software packages which include diverse modules to integrate data across the different business units of an organisation, such as finance, manufacturing, sales or human resources (Esteves, et al., 2001). Each module can be considered as a single application, specific to a business process, accessing a core or shared database (Poston, et al., 2001). ERP encompasses “techniques and concepts for integrated management of businesses as a whole” (Leon, 2008). By doing so, ERP implementation facilitates the information flow between the different functions, in order to achieve the “effective use of management resources to improve the efficiency of enterprise management” (Leon, 2008).
ERP is commonly used nowadays in the most diverse companies, especially in the industry related ones. According to a recent Aberdeen Group study, 92% of manufacturing companies have implemented ERP. This implementation led consequently to reductions in inventory levels, better inventory accuracy and increased compliance of manufacturing and transportation schedules (Castellina, et al., 2012). The success of ERP systems in the manufacturing world is correlated with the origins of ERP: Material Requirement Planning (MRP) and Manufacturing Resource Planning (MRP II). Both concepts, MRP and MRP II, are fundamental for production management and control (Leon, 2008).
MRP, which was introduced in the 1970’s, helps managing the factory’s needs for materials, both for the final product as well as for the productive equipment (e.g. spare parts).
To do so, MRP requires inputs such as the production schedule (based on demand), the current inventory status, and open and planned orders from the shop floor and from suppliers (Langenwalter, 2000). Another important input for the MRP is the Bill of Materials (BOM), which lists all the necessary materials to manufacture an end product. The benefits of an accurate portrayal of materials needs are twofold: On the one hand it allows for a more effective planning of manufacturing activities, thus facilitating the establishment and compliance of delivery dates. On the other hand it also results in a reduction of inventory levels, as materials are ordered only for when needed, and just strictly necessary or critical materials are kept in stock. In short, MRP aims to enable planning in order to “have the right items, in the right quantities, at the right time” (Langenwalter, 2000).
MRP II appeared a decade after its predecessor. It is a broader system, which not only coordinates production and manufacturing processes, but also human relations and financial aspects. It also introduces simulation capabilities for better decision making. Outputs from MRP II, such as business plans, shipping budgets, and inventory projections, integrate information from different departments (Leon, 2008). Although MRP II encompasses some of MRP’s functionalities, they are complementary systems.
The expansion of MRP and MRP II, associated with their apparent advantages, led to the development and implementation of ERP systems in the early 90’s. According to the Aberdeen study, the main reasons companies presented for making the decision to implement an ERP system are achieving cost reductions and managing growth, as shown on the graph below (Figure 4). These two reasons are correlated, as the addition of new departments, human resources and processes is an inevitable result of the expansion of an organisation. These new additions will inexorably lead to further expenses, which need to be controlled so as to achieve cost reduction. (Castellina, et al., 2012)
Although the benefits of ERP systems are apparent, its implementation is a complex process. Pastor and Esteves proposed a framework for an ERP system life-cycle (Figure 5). This life-cycle is composed of different stages from the decision to implement the system, to its maturity and then its retirement. The first phase in the life-cycle is the adoption decision. During this stage the organisation managers study the possibility of implementing an ERP system, and what configurations best apply to their business. This is a phase of definitions: system requirements, goals, benefits and impacts should be established during this period.
Figure 4 - Stated Reasons to Implement ERP Source: Aberdeen Group, June 2012
This decision is followed by the acquisition process. It is necessary that the company studies the available offers in the market in order to choose the software that best fits the organisation’s requirements, so as to require minimum customisation efforts. Other factors such as price, training, and maintenance should also be taken into account. The implementation phase is self-explanatory. During this stage the system should be customized and adapted to the needs of the organisation. This can be accomplished with the help of ERP consultants. The fourth phase, use and maintenance, is the longest. It consists on using the systems in order to benefit from the advantages of implementing the ERP software. As with any other software, corrections and improvements are bound to occur. This leads to the next phase: evolution. When the use of the ERP system is well established in the company, new capabilities and modules can be installed, so as to further improve the expected benefits. The final phase is retirement. This only happens when the development of new technologies renders the installed ERP system obsolete or when the evolution of the business needs of the organisation leads to incompatibility issues with the existing system.
However, during the whole process, there are four dimensions that are always relevant: Product, Process, People and Change Management. For a successful implementation of ERP, awareness of software requirements and capabilities, knowledge of the business processes and their adaptability to an ERP system are essential. People should also always be involved, as they will be the users of the system, and this will imply a complex change in their daily routines. For the ERP implementation to be successful, it is necessary to ensure acceptance and willingness to learn about the new system. (Esteves, et al., 1999)
Inherent to the complexity of ERP systems and their life-cycle is the possibility of failure. The time and resources necessary for application do not always bring about the desired benefits. The lack of commitment from the different business divisions, the inclusion of outside consultants whose area of expertise is not ERP, providing inadequate training during and after the implementation, or simply not fitting the corporate culture to the dynamic and interdependent environment needed for the successful implementation of ERP, are common mistakes that can lead to dissatisfactory results. (Barton, 2001) Therefore, careful planning is crucial when studying the implementation of ERP systems, so as to avoid cost overruns and lack of positive results (Poston, et al., 2001).
Furthermore, the evolution of information technology over the last few decades implies that the organisation is also always expanding to new markets and new technologies. By doing so, the requirements and uses of ERP system are constantly being pushed forward. An example of this is the integration of B2B e-commerce modules into ERP systems. The aim of these modules is to facilitate inter-organisational communication. And basing B2B
e-Figure 5 - ERP Life-Cycle Source: Esteves, et al., 1999
commerce in an ERP system provides stable groundwork, with already well defined and parameterised databases and information exchange systems. Therefore, the implementation of B2B e-commerce through ERP allows for the creation of synergies between systems, thus achieving better processing capacity, and less involved costs in future technology enhancements. This continuous enhancement of ERP capabilities, along with the implementation of complimentary systems leads us to one other relevant concept, that of Electronic Data Interchange (EDI).
ERP to EDI
Electronic Data Interchange (EDI) is “a form of inter-organisational electronic commerce where one trading partner (a buyer or a seller) establishes individual links with one or more trading partners through a computer-to-computer electronic communication method” (Lee, et al., 2003). The use of EDI allows for the all procurement process to be established through the ERP system, as explained in Figure 6. All relevant documentation and information can be exchanged via EDI, thus reducing the utilisation of physical supports for information, improving the efficiency and effectiveness of the exchanged information, and improving the quality of the stored data.
As stated above, the utilisation of EDI for exchanging business documents brings several benefits, such as up-to-date storage of accurate information, reduction of processing costs, and shorter lead times. However, deployment costs and lack of interoperability among information systems are two significant obstacles to the wide spread of this technology (Lu, et al., 2000). Nevertheless, it is important to consider that, with the evolution and propagation of information technology and the internet, the cost of utilising EDI has significantly decreased, therefore currently presenting a smaller obstacle to its application (Agi, et al., 2005).
The implementation of EDI can bring about multiple savings to an industry. An efficient data transmission system reduces the need for data processing, thus diminishing the workload for data transcription, controls, and error investigation and correction. It also reduces the delay in communicating information between buyer and purchaser, thus obtaining shorter lead times, which leads to more effective inventory management (less products in stock, smaller risk of obsolete material). (Ratnasingham, 1998)
Figure 6 - Example of EDI use
As EDI is a system of transferring data, it is only rational to integrate it with the existing ERP. With the development of global standards for EDI, the percentage of companies incorporating EDI applications into the existing ERP system is elevated, already ranging values of 80% in a 1997 study by Themistocleous, et al. (Themistocleous, et al., 1997). Therefore, with the level of ERP implementation achieved in the manufacturing industry, as stated above, the development of EDI for exchanging information between companies, particularly between buyers and suppliers, is a logical outcome of the technological development experienced in recent years.
2.4 Inventory Management
In any manufacturing industry there is need for keeping in stock raw materials for production, final products for shipment, and indirect materials and spare parts needed for the productive process equipment. This implies a concern on managing and tracking inventory costs. Holding inventory brings about a myriad of costs, such as warehousing space, inventory management labour, insurances, and depreciation. Also, inventoried goods represent an opportunity cost; they are tied up capital, which is not being invested elsewhere. As such, inventory management strategies are studied and implemented so as to minimize the impact of these expenditures.
Vendor Managed Inventory
Vendor Managed Inventory (VMI) is a cooperative inventory management system, where the supplier, not the buyer, is responsible for running the inventory, and keeping the material stock level. This means that the supplier has access to the buyer’s inventory information and is accountable for the replenishment decisions, including order quantities, shipping and timing. By adopting this strategy, both supplier and buyer acquire certain benefits. The supplier can better control its production planning and/or stock levels, as he has more information available for establishing more accurate forecasts for demand. The buyer improves its fill rates, and since the supplier is responsible for keeping stock level, also avoids stock-outs without incurring the risks of overstocking (Almehdawe, et al., 2010). By establishing this type of partnership with the supplier, the buyer relinquishes control of important decisions, which have not only a strong financial component, but may also have a direct impact on the production schedule. Due to these implications, it is important when establishing a VMI system to establish specific targets and expectations for the quality of the service provided by the supplier (Waller, et al., 2001).
Although the underlining risks of implementing a VMI system are tangible, the benefits are also considerable. On the one hand, VMI implies a reduced inventory cost, as the supplier in a VMI relationship tends to increase the frequency of replenishments. This implies a reduced stock value at any given time. Also, as the supplier has a better knowledge of demand, he can coordinate deliveries so as to achieve better route planning and to avoid less than truckload shipments, i.e. using trucks which are not at full capacity. By doing so, the transportation costs can be improved, if not optimized. On the other hand, VMI provides the supplier with information that allows him to prioritize orders. And by managing orders, the supplier can coordinate different orders and deliveries from different clients so as to assure product availability, and therefore improved customer levels. (Waller, et al., 2001)
Consignment - Vendor Owned Inventory
To take VMI a step further, both supplier and buyer can establish a consignment contract. Under this contract, the supplier’s goods are stored at the customer’s facilities, but are still owned by the supplier until the moment of their consumption. This presents a significant benefit for the buyer as he has the material available at any given time, without incurring in tied up working capital in inventory. Consignment Inventory (CI) also mitigates the risk of inaccurate consumption forecasts. The advantages for the vendor are less evident, but reside mainly in securing its position as a supplier of specific goods, often of materials that the buyer would hesitate to acquire. (Gümüs, et al., 2008)
As under CI the supplier assumes both inventory holding costs and deterioration costs, his expectations and objectives must be taken into account when deciding which materials should be provided under this agreement. It must be a joint decision. Preferably the items which are kept under a consignment inventory are items that the buyer would be hesitant to acquire, either because of their cost or because they represent a new technology. Under this protocol the buyer has the item in stock, available to be consumed, which increases the likelihood of consumption, when compared with the item not being in stock and having to be ordered on purpose. However, the supplier can also opt to implement a consignment protocol either to show good-willingness, and strengthen its position as a supplier, or simply because the power gap between buyer and supplier is too large, forcing the supplier to accept the buyer’s terms in order not to lose sales.
2.5 Kanban
For inventory management, there are several systems that are designed to provide a visual control of the logistical chain, and identify the need for production. One of the most simply and widely applied pull mechanisms is the kanban system, based on the utilisation of authorisation cards also called kanbans. A kanban system is aligned with the implementation of lean and just in time concepts. (Tardif, et al., 2001). A kanban, in its card form, is a piece of paper with information related to pick up, transfer, and production activities. It signals the need for reposition of materials, and is therefore used to control inventory levels. It is one of the fundamental tools in the lean Toyota Production System (TPS).
To explain the concept of kanban, one can refer to the commonly used supermarket analogy: Upon a sale of products to a given customer, a card carrying information on purchased commodities would be forwarded to the purchasing department. Using the information presented in this card, considering product types and quantities, a correct reposition of products can be promptly set in place. This card, in a productive system, would represent the removal of a kanban from a specific inventory. The figure below, Figure 7, demonstrates a possible illustration of a kanban card, with information related to the item number, shop area, storing location, etc. (Ohno, 1988)
The main advantages of a kanban reside in minimising inventory costs and improving productive effectiveness, avoiding the accumulation of raw materials, work in progress, and finished goods at the start or end of any productive stage (Sarker, et al., 1997). However, a kanban system only works effectively under specific conditions, mainly in a linear and well defined production flow. In situations of unstable demands and processing times, great variety of items, long setup times, amongst others, the use of a kanban system would not bring about the desired benefits (Junior, et al., 2010).
Although a kanban system is usually associated with a productive process, considering its origins on the TPS, it can be used as a control mechanism for inventory levels in other environments. Together with the implementation of Radio Frequency Identification (RFID) technology, which facilitates the reading of kanban cards, kanban systems have been set in place in other activity sectors, such as the health care sector. This reviewing of processes, consistent with the application of lean concepts, allows for an effective replenishment of inventory, eliminating waste related to overstock, expired products, and unnecessary workload. Therefore, the range of fields on which kanban systems are being applied is constantly rising, as lean thinking is becoming a tendency across business sectors. (Bendavid, et al., 2011)
Figure 7 - Kanban Card Source: Ohno, 1988
3 The Tobacco Productive Process
After the literature review, this chapter presents an introduction to the tobacco industry, as well as its associated productive process. Although the procurement department is not directly involved in this process, the larger share of its activities exists to provide support to the production departments: Primary and Secondary. Therefore, what follows is a description of the manufacturing process of a volume of cigarettes, from the arrival of the raw materials to the stocking of finished products. The Technical Materials department is also introduced, as it provides all necessary equipment and spare parts for the functioning of the productive process, as well as for all required maintenance.
3.1 Primary
The Primary department is responsible for the processing of tobacco leaves, and the mixing of those leaves to create the different tobacco blends. These blends are specific for each brand of tobacco, as they determine the flavour of the cigarette when it is smoked. Therefore, the primary department has to maintain a constant monitoring of variables such as humidity and temperature during the whole process. Slight variations in these parameters implicate noticeable alterations in the tobacco flavour, hence the placement of control systems along the equipment used for this production stage.
Tobacco leaves arrive at Tabaqueira from the leaf warehouse, after having already undergone a process of aging and drying. They are separated according to their nature. There are four main types of tobacco leaves: oriental, burley, dark, and virginia. The latter is presented in Figure 8 as an example of the utilised raw materials for the production of cigarettes.
After the sorting upon arrival, the leaves undergo a humidification process. They are stored in silos, where the different types of tobacco are pre-blended. The heavier particles are separated from the tobacco mixture, so as only the desired ingredients are kept. Before the end of the process, the tobacco undertakes a final process to improve its flavour and humidity, so as to allow for a smoother cutting process. The tobacco then undergoes a final blending, and is cut to its final form. Thus is created the finished product of the Primary production cycle: the cut filler. The cut filler is the tobacco on its final form, ready to fill the cigarettes. Part of the cut filler produced at Tabaqueira is exported to other tobacco factories. The other part is sent via vacuum tubes to the Secondary department for cigarette production.
Figure 8 - Virginia Tobacco Leaf
3.2 Secondary
The Secondary department is responsible for receiving the cut filler and produce the cigarettes, packaging them appropriately for distribution. For this, the Secondary uses what are called link-ups (LU). Link-ups are two productive sets, one designed for producing cigarettes, and one for packaging them, which function as a whole, forming a single LU unit. The production of cigarette filters is also encompassed in the secondary activities.
When the cut filler from the Primary arrives to the Secondary, it is received in a LU. There the cut filler is disposed on a continuous stream of smoking paper, forming a tube of smoking paper with cut filler. During this process an electronic system controls the input of tobacco, thus guaranteeing that the cigarette extremities are the areas with the bigger amount of cut filler. The continuous cigarette tube is then cut in pieces, with the size of two cigarettes. These pieces are cut once more in half, and a filter is inserted at the end of each cigarette.
The filters arrive to the Secondary automatically via a pneumatic system, directly linked to the filter production facility. The filters are added to the cigarettes with the help of tipping paper, which makes the cigarette mouthpiece. The process of adding the filter and the tipping paper joins two cigarette pieces, so they must again be cut in half. The finalised cigarettes are then rotated to assure that all cigarettes have the mouthpiece facing the same direction for packaging.
The finalised cigarettes are then sent to packaging or put on hold in a buffer. At the packaging area, the cigarettes are wrapped in an aluminium paper called the inner-liner. If they are being packaged in hard packs, an inner-frame is also added. They are then automatically stored in packs, which are wrapped in a polypropylene film. The packs are then packaged in volumes, and these volumes are sent to the case packer to be stored in cardboard boxes and sent to the Finished Product Warehouse to await distribution.
A cigarette pack can be soft (made out of paper) or hard (made out of cardboard), and it can hold different quantities of cigarettes. Not all LU are set up to process every type of packs. Therefore, a careful planning of production, taking into account the different brands and quantities to be manufactured over the week, is essential to avoid unplanned stops or stocked product shortages.
3.3 Technical Materials Department
The technical material department is in charge of running Tabaqueira’s warehouse. This means managing over 8.000 Stock Keeping Units (SKU), and 4.000 additional materials that are not kept in stock, but may be ordered for supplying the productive and maintenance departments with the necessary spare parts.
This department is in constant dialog with the procurement department, as all spare parts purchases are communicated to the technical material department, but must be processed by the procurers. Moreover, establishing new inventory management systems or implementing new protocols with suppliers are processes that involve both departments. This happens as inventory management and technical aspects must be taken into consideration, as well as financial and quality issues.
And as Tabaqueira is constantly growing and expanding, often obsolete productive equipment are discontinued, and new machines are installed in the productive areas. These processes involve the introduction or removal of materials from the system. When new
materials need to be acquired, suppliers must be consulted, lead times, and prices established. This is a cooperative process between the two departments.
Therefore, considering that this dissertation is based on the procurement department, which cannot be disassociated from the technical materials department, this brief introduction of the latter was considered relevant.
4 Presentation of Problems and Solutions
The subject of this dissertation is the application of process improvement in the procurement department of Tabaqueira. As it was mentioned earlier, Tabaqueira has a very well defined structure, rooted in a fully parameterised ERP system. Therefore, it is not feasible to implement any radical change. However, this does not contradict the purpose of process improvement, or even more so, continuous process improvement, where the achieved improvements are not originated in a big successful change, but in achieving small improvements over time. These small improvements, when put together, will lead to an overall improvement with significant impact in the organisation. Considering the incremental nature of these changes and improvements, three problems were selected to be studied and potentially improved.
The first selected problem is the lack of standards in the procurement department. This was a concern that had already been expressed upon the auditing of the procurement department processes by Tabaqueira. In a department that is constantly working with other departments, exchanging information amongst people from the most diverse areas, the existence of standards is essential. This happens not only from a record-keeping point of view, where all existent records should be kept in an ordered manner, but also from the point-of-view of exchanging information in a simple and effective way with people that may not be aware of the full extent of the process. Moreover, the procurement department continuously interacts with external entities. This implies the following of specific PMI rules, based on its Practices & Principles. Legal and security issues must be taken into consideration at all times. As such, a standard that allows mapping out a process, providing its status at any given point, and notifying the user about the necessary considerations for further steps brings about an obvious benefit.
The second problem is the systemisation of the process of creating purchase orders. As it can be inferred from their name, purchase orders are part of the daily business of the procurement department, particularly the ones for spare parts. These orders are requested from every productive department in the company, and have the most varied configurations. A purchase order can be routine, i.e. an order for a material which is frequently bought, or it can present the need for a new material. It can also have different degrees of urgency. As the process of creating a purchase order is extremely complex and time-consuming, it makes sense to try to improve the process for those orders that are more ordinary, so as to free up more time to manage the unusual and/or urgent requests. This problem can mainly be addressed by taking advantage of the advanced and highly customised ERP system implemented at all PMI affiliates, either via the implementation of EDI protocols or by simply automatising the process further.
The third considered problem is related to inventory management, and the reduction of workload necessary for the purchasing of materials, particularly those which are consumed frequently but are low-value. Every purchased material must undergo the same procurement workflow, independently of cost. This often means that the workload necessary to process orders for minor materials, such as screws or bearings, presents a higher cost to the company than that of the materials. The implementation of new inventory management systems, such as a consignment protocol, where the supplier is responsible for the processing workload is an apparent solution to this problem. Associated with this protocol is the increasing focus of Tabaqueira on using consolidators, i.e., suppliers IR that offer a wider range of materials.
Also, the employment of a kanban system presents a solution for a quick visual management of stocked materials, diminishing the need for constant controls, which imply more workload.
Considering the differences between the three projects, a problem/solution description, for each project, has been adopted, as it has been considered to be clearer than an all-problems description followed by the all-solutions description. This will provide the reader with a straightforwardly comprehensible flow of information, so as to better grasp the proposed solutions to the addressed problems.
4.1 Lack of Standards in the Procurement Department 4.1.1 Problem Description
As stated earlier, this first problem addresses the lack of standards in the procurement department. Although standard documentation is necessary for every process, the process which is considered in this dissertation is the negotiation process for the providing of a new service by an external entity. This is a process that occurs often, as it can be required by any department in Tabaqueira. The services provided can be simple, such as auditing the electrical installations of a warehouse, or more complex, such as redesigning and reconstructing a set of offices. However, no matter their complexity, negotiation processes are all based on the same workflow, allowing, naturally, for several variations, namely in the required documentation.
When a need for services provided by an external entity arises in any of Tabaqueira’s departments, it is the responsibility of the procurement department to lead the negotiation process. During every stage of this procedure the procurement department must follow PMI’s practices and principles. Keeping accurate records and following the existing guidelines becomes of essence.
A process to establish a new contract, as described below (Figure 9), begins when a department states the existence of a need that must be met.
The nature of these needs is most varied, ranging from consulting, to engineering, human resources or even translation services. Nevertheless, independently of the nature of the desired service, the requesting department must supply the procurement department with all the relevant and necessary information, which must be presented through a unified document, commonly denominated statement of work (SOW). The SOW must clearly specify the
Presentation of Need Statement of Work Market Research Supplier Analysis Request for Proposal Analysis of Proposals Negotiation
Rounds Final Decision
Contract or Agreement
expected deliverables for the project. The accurate description of these deliverables is particularly relevant, not only so the external companies can provide a precise description of their proposed services and budget, but also to guarantee that the comparison between different proposals is viable. Other information, such as the scope of the work, locations, timelines, standards and security issues is also often included in this statement. All presented information is also the base for future analysis of proposed services and their respective quality.
Based on the information provided and with the help of the requesters, the procurement department then begins a market research to establish possible suppliers for the service in question. This market research can be based on different sources: previously consulted or contracted entities, entities that were suggested by other affiliates, or any other companies whose area of business is related to the required service. The market research is complemented by the sending of a Request for Information (RFI). The RFI provides the procurement department with important information to better understand the business scope of the contacted company, as well as its spread nationally and internationally, the dimension and variety of its workforce, and naturally its financial situation. From the information gathered the procurement department, along with the requesting department, elaborate a shortlist of the suppliers to be consulted to provide the service. If deemed necessary, all contacted companies can be added to the shortlist.
The shortlisted suppliers are then required to sign a confidentiality agreement, keeping in line with PMI Principles & Practices for the procurement department. This agreement is of essence, as the information provided to the suppliers is not to be shared, especially considering the existing competition between the three major Tobacco companies. After signing the aforementioned agreement, the suppliers are then provided with the SOW and other relevant material, in order to submit a proposal and a quotation for the specified project. All proposals are then analysed and compared taking into consideration both technical and financial criteria. All internally involved parties are consulted for the comparison and analysis of proposals. The decisions taken during the process always gather the consensus of both the requesting and the procurement departments. After this analysis, further negotiations are undergone, not only for financial aspects, but also for technical aspects of the service. Until an agreement is reached, several rounds of negotiations can be required. Each different round can imply further short-listing of suppliers. At the end of negotiations deliverables and parameters for the evaluation of the quality of the service are clearly established, and mutually agreed upon by Tabaqueira and the selected supplier or suppliers. The process is finalized with the signing of a service contract or agreement.
For every stage of this process, several documents are needed to support each procedure and decision. Even the simpler projects require over a dozen documents, many of them of a legal nature, such as a contract draft, security protocols that must be followed at Tabaqueira, and required certifications. And each type of contracted service requires a different set of documents. A request for an information technology service is different from an engineering or construction service. Both have particular documents that must be filled by or shared with the supplier. Some documents, such as the ones required to open a new vendor for Tabaqueira, are required for internal use. These documents are usually transversal to all negotiation processes.
As it is evident from the description above, the complexity of the information flow becomes a considerable obstacle to a linear and flawless process. The lack of an existing
